CapitaLand Mall Trust - DBS Research 2019-07-04: A Future With Funan


CapitaLand Mall Trust - A Future With Funan

  • Funan reopened its doors last weekend after a three-year transformation, drawing a strong crowd.
  • Contributions from the revitalised mall a key growth driver over FY18-20F.
  • Lower interest rate environment is conducive for growth, as further upside could come from acquisitions.
  • Maintain BUY; DCF-based Target Price raised to S$2.95 after reducing our risk-free rate assumption by 50bps.

BUY; Target Price raised to S$2.95 as CapitaLand Mall Trust could benefit from lower interest rates.

  • Share price has done well as attention has turned to CAPITALAND MALL TRUST (SGX:C38U) as one of the faster-growing large-cap S-REITs with a 2-year CAGR of over 3.0%.
  • Given improved property fundamentals and expectations that interest rates will remain lower for longer, these could continue to boost valuations over the medium term. After cutting interest cost assumptions, our DCF-based Target Price is raised to S$2.95. Maintain BUY!

Where we differ:

  • Deep dive into micro-markets gives us confidence that CapitaLand Mall Trust can surprise on the upside, even as the street remains divided on the stock given the uncertainties over the impact of the surge in new retail supply in 2019, especially Jewel in 2Q19.
  • While we expect some volatility in the east-side malls, we believe that higher contributions from Westgate and Funan will more than compensate for the expected near-term hurdles that Tampines Mall and Bedok Mall, located in the East, may face now. That said, it should normalise in the medium term.

Potential catalyst: Improving rental reversions or acquisitions.

  • We believe CapitaLand Mall Trust delivered operationally and the past tenant remixing efforts are bearing fruit as portfolio rental reversions came in at +1.2%, which is an improvement across most of its malls. The utilisation of its balance sheet to fund further acquisitions also offers an upside surprise to our estimates.


  • Reiterate BUY; Target Price lifted to S$2.95 as we revise discount rate assumptions in our models (risk-free rate reduced from 3% to 2.5%).
  • The stock currently offers FY20F DPU yield of c.4.6%. See CapitaLand Mall Trust's dividend history.

WHAT’S NEW - Funan welcomes the future of retail

Funan reopened its doors after a three-year transformation, drawing a strong crowd over its opening weekend.

  • Two months following the launch of the iconic Jewel at Changi Airport, the CapitaLand Group (CapitaLand Mall Trust) returns with a revitalised Funan. Apart from the façade upgrade, the core of the revamped Funan – infused with digital elements, bears the hallmarks of a future-ready mall.
  • The integrated development also comprises two office towers and Ascott’s first co-living property, lyf Funan, which are self-sustaining demand generators for the retail podium. The merits of CapitaLand group’s integrated approach should start to unfold in the subsequent quarters when the office and co-living blocks are fully operational.
  • Post revamp, Funan now houses a rich variety of over 190 brands that pay homage to both its IT roots and sociocultural heritage in the Civic District, where the mall is strategically located. Similar to Jewel, its unique showcase of local brands (60% originate from Singapore) allows the new Funan to gain better traction with leisure travellers, in our opinion. The introduction of more than 30% of new-to-market concepts also injects vibrancy into the local retail scene.

“There’s something for everyone”.

  • Positioned as a social retail hub, Funan also features a rooftop urban farm that is open to the public and can be complemented with adjacent Japanese restaurant Noka’s farm-to-table dining experience. Next door, The Ark runs Singapore’s first fully unmanned futsal facility. Indoors, at the heart of Funan lies the 25-metre tall Tree of Life, an incubator housing 20 retail pods that can be used by up-and-coming brands to showcase their crafts or conduct workshops. The Tree of Life sits atop an indoor rock-climbing gym operated by Climb Central.
  • In addition to a Golden Village cineplex, which offers Virtual Reality pods, the mall will also soon be home to local performing arts group W!ld Rice’s first in-mall theatre. Meanwhile, bike enthusiasts can also enjoy an extension of the shared cycling track that goes through the mall, a dedicated Bicycle Hub and end-of-trip amenities located on the ground floor of the building.

Embracing the future of retail.

  • Funan has come a long way from a retailer of IT products to successfully repositioning itself as a true “IT mall” today. Its overarching digital strategy aims to optimise operational efficiency, maximise impact of tenants’ shopper engagement efforts and ultimately, enhance shopper experiences. Patrons at the food court, KOPItech can place orders via Facebook Messenger or through self-service ordering kiosks. Electronic queuing systems also eliminate the need for physical queues at the respective food stalls.
  • Sensor-enabled directories, which can be easily found across the mall, are another initiative. While typically used for wayfinding, these smart directories are also able to make targeted product/dining recommendations according to the shoppers’ demographic profile. Analytics programmes running in the background also allow tenants to better analyse footfall and refine their offerings. According to CapitaLand Mall Trust, shoppers can also expect a robot-enabled hands-free shopping experience and 24/7 click-and-collect drive-through service by year-end – a first for retail malls in Singapore.

Return of Funan to drive earnings growth.

  • While it may take time before the viability of Funan’s unique retailing approach can be ascertained, it is a big leap forward for CapitaLand Mall Trust as it demonstrates the REIT’s thought leadership in embracing and integrating technology with traditional retail. This bodes well for future AEI and redevelopment opportunities in CapitaLand Mall Trust’s portfolio and if successful, could pave the way for a significant share price re-rating in future.
  • The relaunch of Funan after a three-year hiatus is also set to talyse earnings growth from 2H19, which we discussed in an earlier report (found here).
  • We estimate that Funan alone could add an additional 0.3 Scts and 0.7 Scts to FY19F and FY20F DPU respectively, anchoring robust DPU growth of c.3.2% over FY18-20F.

Carmen TAY DBS Group Research | Derek TAN DBS Research | 2019-07-04
SGX Stock Analyst Report BUY MAINTAIN BUY 2.95 UP 2.550